Sands tax case sent back to lower court

The Sands family's bill in its long-running tax dispute with the Internal Revenue Service could increase substantially since a federal appeals court sent parts of the case back to a trial judge for a new hearing.

Members of the wealthy Sands family, including Constellation Brands CEO Robert Sands and Chairman Richard Sands, were accused by the IRS of using an illegal tax shelter to make $120 million in capital gains look like tens of millions of dollars in losses in 2001 and 2002 partnership returns.

After sending the IRS an $18 million check, the family sued the agency in 2006 in a bid to reverse the IRS' findings.

In a final ruling four years later, Judge Emily Hewitt of the Court of Federal Claims found that the family had used a tax shelter and let stand a 20 percent penalty imposed by the IRS. In earlier decisions, she had cut the family's liability, scratching an additional 40 percent fine and declining to rule on the IRS' charge that Sands family partnerships used sham transactions to create phony losses.

In a tactical retreat a year into the court battle, the Sandses agreed to drop attempts to claim losses disputed by the IRS and accepted the agency's calculations of gains family members had realized on sales of Constellation Brands stock.

In making those concessions, the family admitted to no wrongdoing and was interested only in moving the case along, its lawyers stated in court filings. Conceding the point should excuse the Sandses from the 40 percent fine, however, the Sands attorneys maintained.

In a decision handed down in June on a government appeal, a panel of the U.S. Court of Appeals for the Federal Circuit said Hewitt had erred in ruling that the 40 percent penalty could not be applied and in declining to rule on the IRS' claim that the transfers of family members' assets in and out of charitable trusts were sham transactions. The panel sent both questions back to Hewitt to consider anew.

"These taxes were paid in full by the appropriate parties long ago, and the Sands and related entities commenced this civil case for a refund. This matter is personal to the Sands family and related entities and does not involve Constellation Brands," Cullinan said in an email.

Formerly known as Canandaigua Wine Co., Constellation Brands was founded in the late 1940s by the late Sands family patriarch, Marvin Sands, father of Richard and Robert. Under the brothers the Ontario County firm has grown into a $3.2 billion wine, beer and spirits company controlling many well-known brands. Sands family members control a majority of the publicly traded company's voting stock.

Sales of Constellation Brands stock that Marvin Sands left to his sons, wife and other descendants are at the heart of the tax dispute. The company is not directly involved. Only Sands family members' personal tax liabilities are at issue.

In the tax flap, the family used two sets of transactions, which the IRS claims are part of an abusive tax shelter called "Son of BOSS." An iteration of an earlier tax shelter called the bond and option sales strategy, Son of BOSS involves a series of rapid-fire trades and short sales of securities that appear to turn gains into losses.

The IRS identified the Sands family as one group among clients of a now-defunct Texas firm called the Heritage Organization LLC, which had marketed Son of BOSS schemes to scores of wealthy clients as a way to avoid capital gains taxes. Government investigators got access to Heritage Organization books and records after the company filed a Chapter 11 bankruptcy petition.

Heritage Organization founder Gary Korn-man, a tax attorney and investment adviser, was barred from the securities industry by the Securities and Exchange Commission in 2007 after he pleaded guilty in federal court in Texas to a criminal charge of making false statements to SEC investigators in an insider trading case.

In the criminal case, Kornman had negotiated a plea deal in which he drew two years' supervised probation and a $143,465 fine. In 2010, an appellate panel in the Federal Circuit rejected his bid to have the SEC review the decision banning him from securities trading.

In one alleged Son of BOSS transaction, IRS auditors found that Sands family members had sold $75 million worth of Constellation Brands shares for a $66 million profit but used Son of BOSS manipulations to fictitiously inflate the share's basis from $9 million to $94 million, creating an apparent $20 million loss.

In another Son of BOSS maneuver, IRS attorneys alleged in court papers, Sands family partnerships bought and traded shares of Yahoo Inc. and Corning Inc. in transactions designed to falsely inflate the basis of those companies' shares more than 3,000 percent.

In the first transaction, Sands family members channeled the Constellation Brands stock sales through tax-exempt vehicles called charitable remainder unitrusts, claiming that distributions of proceeds from the sale of stock were tax-exempt as a result of being passed through the unitrusts. It is those transactions that the IRS labeled as sham.

In court papers, Sands family lawyers maintain that in making the alleged Son of BOSS maneuvers, the Sands family, whose members have no special knowledge of tax law, followed what it considered to be reasonable expert advice as to how to invest in a tax-efficient manner and should not be tagged as intentional tax cheats.

Not so, government lawyers countered. Robert Sands, a lawyer, and Richard Sands, who holds a Ph.D., are experienced and sophisticated businessmen who lead a $3 billion corporation and should have been well aware that the propriety of Son of BOSS arrangements was questionable.

In the June decision, the Federal Circuit panel said it would not act on a Sands family appeal seeking to reverse Hewitt's finding that the family had used a tax shelter and thus owed a 20 percent penalty. Consideration of the family's appeal would be premature because the question will be moot if Hewitt finds for the IRS on the 40 percent penalty and sham transaction questions, the panel said.